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Cocoa grind to prove 'low' in EU and US, as West Africa levy hits

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The rise in cocoa values spurred by the levy placed by Cote d’Ivoire and Ghana on exports will fuel a sharp decline in demand growth, the International Cocoa Organization said, foreseeing “low” grindings in Europe and the US.

 

The International Cocoa Organization – expanding on a forecast on Friday of a 2019-20 world cocoa production deficit of 85,000 tonnes – said that demand from processors would continue to grow, reaching 4.86m tonnes.

 

However, the rate of year-on-year expansion, at 1.2%, “remains lower than last year’s level of 4.5%”, the intergovernmental group said, citing the pressure on grinding margins from raised costs.

 

“Higher cocoa bean prices quoted for some origins are likely to erode manufacturers margins and therefore reduce processing volumes,” the ICCO said.

 

Top growers Cote d’Ivoire and Ghana are from 2020-21, as starts in October, imposing a $400 “living income differential”, or Lid, on cocoa exports - a levy introduced to support their farmers’ incomes.

 

‘Taking their toll’

What growth in cocoa demand there is “is expected to originate mainly from Asia followed by Africa, due to the steady expansion of grinding capacities in the two regions”.

 

Processing volumes in Europe, which remains the top grinding region, and the US “are expected to be low for the current season”, the ICCO said, foreseeing a near-2% fall to 1.50m tonnes in European Union processing volumes, including expectations of a 2% drop to 435,000 tonnes in Germany.

 

The organisation noted reports from German indsutry that higher costs of agricultural commodities were “taking their toll on the profits of many” of the country’s confectionery manufacturers, with the likes of sugar and dairy prices also having enjoyed buoyancy until the Covid-19-caused dent to broad market sentiment.

 

“Chocolate confectionery is no exception as cocoa prices have been on an ascending trend since the end of 2019.”

 

Grindings in the US were seen flat in 2019-20 at 400,000 tonnes, with declines forecast for Canada and Mexico.

 

‘You’ll see price increases’

The comments follow a caution last week from Lindt & Spruengli, the Swiss-based chocolate maker, that manufacturers will be forced to raise their prices to pass on the extra cost of the living income differential.

 

“Over the next few months, you’ll see price increases,” Dieter Weisskopf, the Lindt chief executive, said.

 

“Not just us, especially from private labels.”

 

Commerzbank said with Cote d’Ivoire and Ghana “together accounting for more than 60% of the world’s cocoa supply and thus occupying a market-dominant position… switching to alternative suppliers is therefore no easy matter”.

 

This is especially so “as the increased demand for cocoa beans, for example from Ecuador, Cameroon, Nigeria or Indonesia, is also likely to drive prices up there,” the bank added.

 

Lindt, which reportedly sources as much as 80% of its cocoa from Ghana, says adjusting the origin of its imports could affect the taste of its products.

 

African expansion

The ICCO, by contrast, forecast grindings in origin countries rising by 66,000 tonnes, or nearly 3%, in 2019-20 to 2.37m tonnes, including a 10,000-tonne increase to 615,000 tonnes in Cote d’Ivoire, cementing its top rank.

 

Volumes in the Netherlands, historically the top grinding country, were pegged at 595,000 tonnes this season.

 

The ICCO, noting that “the Ivorian government has decided to give tax derogations to investors who are ready to establish and promote cocoa processing activities”, flagged plans by Malaysian grinder Guan Chong to build a 60,000-tonne plant in the country, and by Cargill to expand its own capacity there.

 

Cargill is also expanding its operations Ghana, where German-based Fairafric has voiced plans to build a processing facility.

 

‘Heightened concern’

The ICCO’s forecast of, another, world cocoa output deficit in 2019-20 reflects expectations of a modest expansion in world production too, of 1.7% to 4.82m tonnes, reflecting “less-than-favourable weather conditions and outbreaks of diseases” in West Africa.

 

“Heavy showers earlier on in the season are reported to have caused the spread of black pod disease,” the organisation said, noting now the threat of dryness to the region’s midcrop harvest.

 

“There is heightened concern for production in West Africa as the critical growing period for the crop is experiencing inadequate rainfall.

 

“Should this phenomenon continue, then the mid-crop would be expected to be below potential.”

 

Cote d’Ivoire output in 2019-20 was currently seen growing by about 26,000 tonnes year on year to 2.18m tonnes, with that in Ghana showing a more substantial gain, of 38,000 tonnes to 850,000 tonnes, even as it continues to grapple with an outbreak of swollen shoot virus disease.

 

“In Ghana, production is witnessing a precarious recovery.”

 

In fact, West Africa has seen showers in recent days, according to weather service Maxar, which said that "the boost in moisture will favour both growth of the mid-year crop, and flowering of the main crop".

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